market-model healthcare

In America, the discussion over healthcare often bifurcates between advocates of government and market-based healthcare. Empirically, European-style government healthcare systems, as well as Medicare, are more equitable, cost-efficient, and sustainable than our own, presumably “free market” health insurers (Fox Health). However, America’s healthcare system is actually anything but free market. American government expends more than 56% of total healthcare costs through Medicare, Medicaid, the VA, and other programs (Selden and Sing). The American government healthcare system actually spends more per person than any other, and so in some sense is the most socialist (Council on Foreign Relations). The nominally “private” health insurance industry, which lobbies vituperatively against government healthcare, is subsidized by $300 billion in tax deductions, three times larger than any other deduction (Tax Policy Center). The for-profit health insurance industry emerged in response to these deductions in the 1960’s; it was not produced by, and does not compete in, natural market conditions. Is there an actual, broadly market alternative?

Yes. While government always plays a role in healthcare, in Singapore, a tiny, wealthy city-state in Southeast Asia, Government purchases less than 40% of healthcare (WHO). The plurality of healthcare spending comes from private medical savings accounts rather than either government or subsidized insurance, indicating a primary healthcare market mechanism. This system is radically more cost-efficient even than European Social-Democratic Systems or Medicare, while also providing universal care. In Singapore, a minuscule 3.9% of GDP is spent on healthcare, about a third of the European average, and less than a quarter of America’s. Government healthcare spending is a little more than 1.5% of GDP (Ibid). If America could reproduce this cost-efficiency, the US government would spend less than $240 billion a year on healthcare, or around a fifth of its current spending. Still, in Singapore everyone is covered and life expectancy is seven years longer than in America.

How does Singapore’s market-model healthcare system work?

In addition to a system of government subsidized public hospitals and government cost-oversight, Singapore’s healthcare model rests on the “three M’s” – Medisave, Medishield, and Medifund. Medishield is universal national catastrophic government insurance. Medifund, funded solely by dividends from a government seed investment, provides care for the needy and destitute. Medisave is a mandated system of private Medical Savings Accounts that is a part of Singapore’s Central Provident Fund. The Central Provident Fund is a government-run mandated savings system in which Singaporeans set aside approximately one third of their yearly income (CPF Board).

“Medisave,” between 6.5% and 9% of a citizen’s income, is devoted solely to medical expenses. In Singapore, private households purchase most healthcare services out of pocket from these accounts, which is the key to the market system.

Without government welfare guarantees, households must save a large percentage of their income in anticipation of potential adversity. The Central Provident Fund, including Medisave, forces households to secure these savings. Interestingly, mandated savings is therefore not a market distortion, but a means to preserve pre-Government market conditions without abandoning Government welfare guarantees that are needed in a modern society.

The Medisave System then restores a normal supply-demand market that drags down costs, and is the Singapore market-model’s key component.

Although this may seem callous at first, in a private market, “supply” or cost of services cannot exceed the “demand,” or amount of money private customers are willing and able to spend on those services. Governments and Health Insurance Companies have exponentially more money than private households paying out of pocket. In a hand-to-hand market, doctors and hospitals can only charge private households so much before households run out of money. This places a natural limit on healthcare costs in a normal market. In Singapore, prices have dropped accordingly. Singapore’s healthcare services are so low that the city-state has become one of the world’s leading Medical Tourism destinations (Chanel News Asia).

Fortunately, Singapore’s government provides “patches” that also guarantee that no one slips through the cracks in the Medisave system, as noted through Medishield and Medifund. It also ensures price transparency by mandating its health vendors post their actual, pre-insurance, prices in order to receive licenses. Singapore’s government carefully monitors for fraud and abuse of the system, and then imposes draconian punishments for infractions.

What would America have to do to replicate Singapore’s market-model healthcare system? First, like Singapore, we would have to mandate national savings in a variation of a Government-run Central Provident Fund that includes mandated Medical Savings Accounts. Second, we would have to remove the government tax deductions that create and sustain the parastatal health insurance industry. Third, the government would have to systematically subsidize and monitor hospitals so they function more like Singapore’s inexpensive public hospitals. Fourth, American government insurance – Medicare, Medicaid, FEHB, and such – would have to be re-organized into versions of Singapore’s “Medishield” and “Medifund.”

America’s government healthcare is now primarily means-tested, either by age or income (US Department of Health and Human Services). American versions of “Medishield” and “Medifund” would provide everyone with coverage, but this coverage would only kick in once normal market mechanisms were exhausted. This would re-capture a normal supply-demand market while ensuring no one “slipped through the cracks.”

An American market-model healthcare system like Singapore’s may seem Utopian at the moment, but this Utopianism stems from Political Opposition from inefficient rent-seekers rather than the infeasibility of the project itself. Our current system’s cost-trajectory is Utopian; it is unsustainable unless we fix it. American businesses should seriously consider advocating for a Singapore-style market-system, which would radically reduce their costs and improve their ease of doing business. Those interested in an effective market-model healthcare system should stop defending our broken, government-created system, and start carefully examining what actually works